Taiwanese Foreign Exchange Intervention 2001-2020: the best proxy for intervention with considering hidden reserve issue and the estimation of intervention policy reaction function

Abstract

The secretive Taiwanese foreign exchange intervention (FXI) and hidden reserve issue have posed difficulties for studying the exchange rate policy taken by the Central Bank of Taiwan. To get a clear grasp of the Taiwanese exchange rate policy even in lack of officially disclosed FXI records, firstly, I find out the most accurate proxy for the Taiwanese FXI in the existing literature. Secondly, I estimate the central bank's FXI policy reaction function, using the most accurate proxy. It turns out that there exists one structural change within the central bank's FXI around December 2011. Before December 2011, the central bank basically adopted lean-against-the-wind intervention in the short run, enhanced the New Taiwan Dollar's value in the long run, and asymmetrically conducted the interventions. In contrast, after December 2011, the central bank became less engaged in the outright purchasing/selling operations in the FX spot market.